Summary

2021 has seen $103 billion in venture capital funding into FinTech, and its payments and new payment platforms that have been the biggest source of both new VC funding and also IPOs over the course of 2021. Electronification of payments accelerated through the pandemic due E-Commerce. Looking at the unicorns, there are some huge companies likely to IPO in 2022-23, including Stripe, Klarna and Revolut. The SPAC phenomenon has led to European FinTech companies tending to list in the US, however Klarna and Revolut appear likely to list in Europe. When FinTech companies come to market they prefer to be promoted by tech analysts (rather than financial) in order to promote their tech credentials. But it's not all about the technology. There are various sources of regulatory arbitrage; various gaps in the regulatory framework that some of these companies are exploiting. For a large US bank, the capital requirement for $10,000 deposit is $500. For a wallet provider like PayPal, which now holds $38 billion of customer, there's a zero requirement. In Europe, for a large bank, the requirement is $200. So, there are arbitrage opportunities depending on whether the platform is established as a bank or as a wallet, and then also between the US and Europe.

Wallets have become attractive because interest rates are very low so there’s no difference between getting zero in a wallet and getting zero in a bank account. Furthermore, the insurance that comes with bank deposits has lost resonance with bank failures at record lows. Durbin is a US specific phenomenon and a huge source of regulatory arbitrage; Any bank with more than $10 billion assets in size has a cap on the interchange that they're able to levy on debit transactions. Any bank, less than $10 billion, doesn't have to sit under that cap and many FinTech companies have partnered with small banks, Bancorp, Green Dot, Sutton Bank being the three largest. The returns to those FinTech companies are therefore higher, but they're also able to offer more back to their consumers through rewards. Their market share has thus grown significantly relative to the big banks. The argument is that the regulators will not challenge this because FinTech customers are amongst the underbanked segments of the population, and the quid pro quo for loose regulatory stance is that these FinTechs are boosting financial inclusion.

For bank regulators, super apps being launched by PayPal, by Revolut and others, moulded on the Chinese Alipay model, represent a threat. They put payments front and centre and banking become subsidiary to that. And from a regulatory perspective, that becomes much more difficult to regulate. Moreover, big tech companies are now doing everything: banking, credit, provision and payments and although Google has abandoned its banking entrance strategy, it is one of the biggest payment providers in India. Banks see big technology companies entering finance as a huge threat, perhaps even bigger than that posed by FinTech. Historically, there's a regulatory trade-off in financial services between competition and financial stability. Something tech start-up founders broadly don’t comprehend. Their strive towards efficiency and lower friction are met by the brick wall of financial services; central bankers and policymakers essentially don't like competition. Once FinTechs get beyond a certain size – like Alipay - then regulators will intervene and reduce competition in order to promote stability.

Furthermore, there's an open banking mandate which requires for banks to share their data with payment providers, which could include big technology companies. However, there isn’t reciprocity; Google isn't compelled to share their search data with Barclays, nor e-commerce data, nor social data. In Europe, bankers are beginning to complain that the field is not level. Globally, more and more banks are talking about central bank digital currencies. There's a monetary incentive, but there's also an incentive in some countries in Europe where a nervousness about the power that is now in the hands of say Visa or MasterCard or potentially Facebook is the catalyst for central bank digital currencies being taken much more seriously.

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